In the Australian financial landscape, mutual funds, often known as “managed funds“, constitute a financial vehicle that pools money from various investors to invest in a portfolio of assets, which may span multiple asset classes or focus on a single asset type. Instead of buying the underlying assets directly, investors buy “units” in the fund itself.
This structure can allow individual investors to gain access to a professionally managed investment portfolio of mutual fund assets, typically of a type or scale that is beyond the reach of individuals, whether in shares, bonds, property, mortgages, or a combination of all of these.
At ASCF, our pooled mortgage funds are a specific type of mutual fund investment. Just as an equity fund pools capital to buy shares, we pool investor capital to lend to borrowers, with loans secured by Australian real estate.
What Are Mutual Funds and How Do They Fit into an Investment Strategy?
To understand how mutual funds work, you must understand the relationship between the investor and the responsible entity (or fund manager).
The overall size and value of a fund is measured by its Net Asset Value (NAV), which represents the total value of the fund’s assets minus its liabilities. When you invest money into a mutual fund, your investment is represented by ‘units’, making you a unitholder. The NAV per unit is then calculated by dividing the total NAV by the number of units held by investors.
Because the value of these underlying assets must be carefully managed to generate returns, mutual funds rely on the expertise of dedicated investment managers.
The Role of Professional Management
One of the primary advantages of mutual fund investing is gaining access to professional management. Fund managers are financial experts who are responsible for making investment decisions on behalf of investors. Among other responsibilities, they conduct rigorous research, analyse market volatility, and select securities that align with the fund’s investment strategy.
For many mutual funds, this professional management removes the burden of daily trading from the investor. Instead of researching hundreds of individual securities, investors can delegate that responsibility to an investment manager.
How Mutual Funds Generate Returns
Investing in mutual funds typically generates returns for investors via income distributions:
- Income Distributions: If the fund is liquid and invests in assets that generate income, this income is passed on to investors (minus expenses).
Types of Mutual Funds Available to Investors
Mutual funds come in a vast array of categories, which are designed to meet different investment objectives and risk tolerances. Common types of mutual funds include:
Equity Funds (Share Funds)
These funds invest primarily in shares of publicly traded companies. Their goal is usually long-term capital appreciation. Equity funds can be further broken down into:
- Growth Funds: Focus on companies that are expected to grow at an above-average rate.
- Income Funds: Focus on dividend-paying shares with the aim of providing targeted returns.
- International Funds: These funds invest in companies that are located outside of Australia, allowing investors to diversify geographically.
Asset Allocation Funds
Asset allocation funds (sometimes called hybrid funds) invest in a mix of asset classes, such as shares, bonds, and cash.
Target date funds are a popular type of asset allocation fund that automatically adjust the risk profile (typically becoming more conservative) as the investor approaches a specific date, such as retirement.
ASCF Mortgage Funds (A Specialised Mutual Fund)
So, where do ASCF funds fit into this equation? Our mortgage funds are a specialised type of income fund.
- Structure: Like a standard mutual fund, we pool capital from a range of investors.
- Asset Class: ASCF funds invest in registered mortgages over Australian property.
- Objective: To provide interest income through regular targeted distributions.
Index Funds vs Actively Managed Funds
A major distinction in the world of mutual funds involves the management style:
- Actively Managed Mutual Funds: Active mutual funds have professional fund managers who attempt to outperform the market (beat the index) through research and asset selection. Because of the intensive research required, these funds often have higher performance and/or management fees.
- Index Funds: An index mutual fund aims to replicate the performance of a specific market benchmark (like the ASX 200). They do not try to beat the market, but rather match it. As a result, these funds typically have lower expense ratios.
The Mechanics of Mutual Fund Investing
Net Asset Value (NAV) and Unit Pricing
Unlike shares or exchange-traded funds (ETFs), which trade throughout the day at fluctuating prices, many managed fund units are valued periodically based on the value of the underlying investments. The frequency of valuation and pricing depends on the structure and investment strategy of the fund. This unit price is distinct from the net asset value (NAV), which is the total value of the assets in the Fund.
Fees and Expenses
Costs are a critical factor in a fund’s performance over time. Mutual funds may charge various fees to cover their operations, including:
- Expense Ratios: Many funds charge this as an annual fee expressed as a percentage of your mutual fund assets. It may cover performance fees, management fees, administrative costs, and other operating expenses, depending on the fund structure.
- Redemption Fees: Some funds charge a fee if you redeem your units within a short timeframe to discourage short-term trading.
- Contingent Deferred Sales Charge: This is a fee paid only if investors redeem units within a certain number of years. This is less common in modern Australian managed funds.
ASCF Funds only charge performance fees, which are paid by the funds after distributions are paid (meaning distributions are net of all fees).
Benefits of Investing in Mutual Funds
Why do most mutual funds remain popular despite the rise of other investment options? There are a few key reasons, such as:
Diversification
Achieving a truly diversified portfolio as an individual investor can be expensive and difficult. However, by pooling money with other investors, a mutual fund can hold hundreds of different securities. This means if one security performs poorly, it is balanced by others, mitigating the investment risk.
Professional Management
For those who lack the time or expertise to research other securities and analyse financial statements, professional management is another key benefit of mutual funds. Professional investment managers handle the complex asset allocation decisions.
Accessibility
Many retail mutual funds have a relatively low minimum investment amount, making them comparatively accessible to everyday Australians, provided they meet the other eligibility criteria.
This is distinct from wholesale mutual funds, which are restricted to investors who meet particular eligibility criteria and financial thresholds, specifically those with net assets of at least $2.5 million or a gross income of at least $250,000 for the past two financial years. Investors who qualify under these tests must also provide a certificate from a qualified accountant certifying they have “a prescribed net asset or gross income level.”
Risks Associated with Mutual Funds
While they offer diversification benefits, investing in mutual funds is not without risk. Common risks include:
- Market Volatility: The value of mutual fund assets can fluctuate. Changes in the value of the underlying investments or securities held by a fund may impact the fund’s value.
- No Guarantees: Mutual funds are not guaranteed. Past performance is not a reliable indicator of future results.
- Fees Impacting Returns: High management fees and expense ratios can eat into your potential returns over time, although ASCF funds don’t have management fees, and returns are paid net of all expenses. It is vital to read the fund’s Product Disclosure Statement (PDS) to thoroughly understand all costs.
Mutual Funds vs Exchange Traded Funds (ETFs) vs Hedge Funds
It is important to distinguish mutual funds from other pooled structures, such as ETFs and hedge funds. Below are some of the key differences:
- Mutual Funds vs Exchange Traded Funds: Exchange-traded funds (ETFs)—such as those listed on the Australian Stock Exchange (ASX)—are similar to mutual funds in that they hold a basket of assets. However, ETFs trade on a stock exchange throughout the day, whereas managed fund units are generally bought and sold according to the fund’s unit pricing methodology.
- Mutual Funds vs Hedge Funds: Hedge funds are private investment pools that generally use aggressive strategies to generate high returns. They are typically limited to institutional investors or wealthy individuals and often have much higher fees and lock-up periods—mandatory windows of time during which investors cannot withdraw their capital—compared to standard mutual funds.
Investing in a Mutually Beneficial Future
For prospective investors, this guide provides insight into the why and the what of mutual funds. So, is mutual fund investing right for you? Mutual fund investors are ideally:
- Income-Focused: Your main objective is generating a passive income through targeted distributions.
- Medium-Term Thinkers: You don’t need instant access to your cash and are comfortable investing capital for a selected term to secure a better rate.
- Risk-Aware: You acknowledge that pursuing returns above the bank rate involves risk, and you are comfortable with the trade-off involved in secured lending.
An investment in our mortgage investment funds may be suitable if your risk appetite aligns with our Fund’s risk profile. Partnering with a manager like ASCF offers a pathway to potentially generate revenue from your capital over the medium to long term, while also providing valuable diversification away from other assets.
Interested in learning more? Request an Investor Pack today or contact our team to learn more.
As with all investments, each Fund is subject to risks which are set out in the Product Disclosure Statement (PDS). There is a risk that you may lose some or all of your capital and/or a reduction or cessation of distributions. An investment in a Fund is not a bank deposit. Withdrawal rights are subject to liquidity and may be delayed or suspended. The performance of the Funds, the repayment of capital or of any particular rate of return is not guaranteed, and unless expressly stated, performance information contained on this website is not intended to constitute forecasting of future performance. Any information about returns should be considered only as part of a balanced review of the features, benefits and risks associated with an investment in the Funds. Past performance is not indicative of future performance.
This website contains general information only and should not be considered as giving financial product advice or any recommendation by ASCF. It does not purport to be complete, nor does it take into account your investment objectives, financial situation or needs. Prospective investors should consider those matters, read the PDS & Target Market Determinations (TMDs) for the Funds in their entirety and obtain independent expert advice before making an investment decision.
